PSS Fund Performance for December 2007

Welcome to the monthly update on your Fund's investment performance.

ARIA’s primary responsibility is the management and investment of the PSS Fund in the equitable and best interests of all members. ARIA approaches this task by setting an investment objective to maximise the real returns earned on investments subject to a tolerable level of short-term volatility.
Table 1: The PSS Default Fund Earning Rate as at end December 2007 (%)  

Table 2: Monthly Allocated Earning Rates (%)  

Table 2: Historical Fund Earning Rates over the last five years (%)

*this is an unaudited 30 June value.  All Earning Rates are after fees and tax

Commentary:

In December markets reacted to the prospect of a more protracted period of workout for the global financial system and its inability to adequately or transparently price risk.  The ambiguity of macro-economic data (weaker growth prospects but sticky aspects of inflation) further reduced risk appetite.  The combination of “credit-crunch” mechanisms and devaluation of the $US represent risks to global growth via: (i) reduced availability of credit both to businesses and to households; and (ii) tighter developed-world financial conditions outside of the US. 

Continuation of the global liquidity crisis was particularly noticeable in inter-bank short-term rates (for example the Australian three month bank bill swap rate peaked at 75 bps above the RBA cash rate of 6.75%). Five central banks (the FED, Bank of England, ECB, Swiss National Bank and the Bank of Canada) announced mid month coordinated action to restore the circulation of liquidity within the global banking system. The combination of leverage, inadequate pricing models, and a lack of transparency as to the extent of each institution’s sub-prime losses, means that major financial institutions’ risk appetite and willingness to trade have been significantly impaired.  This action involved a range of measures including a temporary Term Auction Facility (TAF), increased repo funding and reciprocal swap lines. Despite these efforts liquidity was still scarce and costly at the end of December.  The success or otherwise of global central banks’ efforts to reduce inter-bank lending rates will be critical to monitor through January. 

Against this backdrop, December was a weak month for global equity markets. Global equities hedged into Australian dollars fell by 0.7%. However, due to a continued decline in the Australian dollar, the unhedged return from global equities declined by 0.5%. In December, US stocks fell by around 1%. European stocks faired better with EU and Germany up around 2.5% and UK flat. With the exclusion of China (up 8%), Asian markets fared the worst, with Japan and Hong Kong down 2.4% and 2.9% respectively. In the financial year to the end of December, global equities fell by almost 3.5% in hedged terms and declined by around than 3.7% in unhedged terms.

The Australian equity market fell by around 2.7% in December, taking its appreciation over the financial year to the end of December back to around 3%.  The strongest sectors were Health Care (up 2.3%), Energy (up 1.6%), Telecoms (up 0.8%), and Utilities (up 0.5%). All other sectors fell, with the largest declines recorded by Property Trusts (down 6.6%), Industrials (down 5.2%), Financials (down 3.5%) and Materials (down 3.5%). The downgrading of listed property trusts reflects market recognition of the risk posed by duration mismatch between short-term loan facilities struck to fund long-term projects.  This was exemplified by Centro’s profit downgrade, which saw its share price drop by around 80% in December, as it faced difficulties rolling over short-term debt.  Note that ARIA has no strategic asset allocation to listed property trusts. 

December was a relatively flat month for government bond markets with bond yields relatively unchanged. In the US 10 year yields rose by around 0.1%, to a level of just over 4%. Japanese 10 year yields were relatively flat at around 1.5% whilst UK 10 year yields fell by around 0.15% to around 4.5%. Germany and Australia, where growth is relatively stronger, experienced increases in their 10-year bond yields by 0.2% and 0.3% respectively. In this way, the Australia-US 10 year yield spread widened further to around 2.3%, its widest level in the last decade.

The Australian dollar declined slightly in December, reflecting a bounce-back in the USD as better-than-expected US manufacturing data provided the market with some hope that the US may avoid recession. The largest falls were against the RMB (down 2.0%) and the USD (down 0.7%) whilst the AUD appreciated by around 2.5% against the GBP.

Table 3: The PSS Cash Investment Option Fund Earning Rate as at end December 2007 (%)  

Table 4: Monthly Allocated Earning Rates (%)

Table 5: Historical Fund Earning Rates since Inception (%)

*this is an unaudited 30 June value.  All Earning Rates are after fees and tax

The Cash Investment Option continues to deliver returns in line with its objectives, once account is taken of fees and taxes.

Alison Tarditi
Chief Investment Officer
6 January 2008